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Time to Bet on the Steel ETF - ETF News And Commentary

The U.S. equity market continues its uptrend on the back of
signs of recovery in the global economy. Now commodities are also
showing a comeback after a steep fall earlier this year, and have
caught investor attention in the past few weeks. This is
especially true in the commodity producer segment like steel
(read:
3 Mining ETFs Finally on the Upswing
).

These producers usually act as leveraged plays on the
underlying commodities. So when commodities are rising, these
firms are truly the winners.

Behind the Surge in Steel

This corner of investing has seen some strength buoyed by the
growing U.S. jobs market and rising consumer prices, encouraging
trade data
from China and cooling of
recession in Euro zone
. Meanwhile, a more sluggish dollar of late hasn't hurt
commodity, boosting demand for this product.

Apart from this, there are signs that China is working to cut
capacity in its steel industry. The National Business Daily
indicated that China could reduce capacity in the sector by 400
million metric tons. The reduction is expected to amount to about
40% of China's steel capacity. A reduction in capacity could help
pricing power among global steel producers (read:
Focus on These China ETFs for Outperformance
).

Given tightening supply and heavy steel re-stocking in China,
steel price has rebounded from 3.5 years lows in recent weeks.
The blast furnace outages in Ohio and Brazil as well as work
stoppage in Ontario disrupted about 4% of the total U.S. steel
supply in the past three months, leading to higher
prices.

Further, a major component of steel - iron ore - climbed to
its highest level in five months, on rising demand from China,
thereby leading to higher steel prices. The iron ore is poised to
benefit further this year as chances of the Fed tapering its bond
buying program in September has increased. If iron ore price
rises, the price of steel will definitely increase.

Steel ETF in Focus

For those buying into this optimism, investors should focus on
the only pure play -
Market Vectors Steel ETF (
SLX
)
- which tracks the NYSE Arca Steel Index. The ETF has amassed
$111.3 million in its asset base while trade in moderate volume
of roughly 73,000 shares a day. The product charges 55 bps in
fees and expenses from investors.

In terms of performance, the fund is still down over 10% in
the year-to-date time frame and is underperforming the broad
market fund and other products in the materials space by wide
margins (read:
6 ETFs Beating the Market Over the Past Year
).

However, SLX added nearly 10% in the past two months and is
expected to move up in the coming months, based on both technical
and fundamental factors described below:

Technical Look

Although the fund hasn't broken out of its near-term range,
its short-term moving averages have managed to stay above
long-term levels. The 9-Day SMA is now comfortably above the
longer-term 50-Day SMA and is rapidly approaching 200-Day SMA,
suggesting continued bullishness for this ETF.

Additionally, the fund is trading near its resistance level of
$44. Crossing this level will show a clear strong uptrend. This
is further confirmed by an upswing in Parabolic SAR, although
this figure should definitely be monitored closely (see more in
the
Zacks
ETF Center
).

Fundamentals

The fund provides exposure to a small basket of 27 stocks and
is highly concentrated in its top 10 holdings with more than 68%
of assets. This suggests that company specific risk is high and
the top 10 firms dominate the returns of the fund.

The two top firms - Rio Tinto (
RIO
) and Vale (
VALE
) - take the largest share in the basket with at least 12% each.
These two firms surged in double digits over the past two months,
part of the reason for the rally in the steel ETF (read:
Steel ETF Investing 101
).

The product primarily focuses on large caps as it accounts for
roughly half of the assets while mid cap takes the remaining
share with a small allocation to small caps at 17%. In terms of
country exposure, the U.S. takes the top spot at 38.2% while
Brazil, Luxemberg and United Kingdom round off to the next three
with 21.2%, 17.3% and 13% share, respectively.

To sum up, the steel ETF could be a good choice for investors
given an improving steel outlook as well as strong technical and
fundamental perspective.

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